Pensions: How safe is your insurer?

By ALAN O'SULLIVAN
Updated: 12:40 EST, 22 October 2008

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The banking crisis has raised concerns about stability of financial institutions.

Safety first: Insurers look after gigantic pension funds, so how safe is yours?

So far, it has mainly been banks affected but now insures have seen their shares hit (Insurers feel the heat). This is Money gives you an overview of the UK insurers market, custodians of the nation's with-profits pensions and investments…

A basic, reassuring truth is that your pension is one of the best-protected financial products in the industry – and therefore there is no great need to stay awake at night worrying.

As pensions have a life insurance element to them, they are not covered under savings compensation rules or the £48,000 maximum compensation paid on investments. They are covered by insurance compensation, which is 100% of the first £2,000 in your pension and then 90% of the balance, with no upper limit.

So if you had a pension pot of £200,000, in the event of your pension provider going bust you would receive £2,000 plus 90% of £198,000, which is £178,200. That's a total of £180,200 and a loss of only £19,800.

But as concerns have been mounting about the stability of insurance companies, we provide you with a run-down of how the market views the main providers.

The stability of your pension provider doesn't guarantee the performance of your funds. If you have a pension with one of the big insurers, Aviva, Standard Life, Prudential, Legal & General and Aegon/Scottish Equitable, then there is a good chance that a sizeable chunk of it is invested in their UK Equity Funds - which invest predominantly in shares of UK companies.

A frightening £13.9bn is invested in the funds run by these giants alone. However, performance is generally behind the five-year performance of either the FTSE All Share or ABI UK All Companies benchmarks.

Funds are also put into managed funds, which fare relatively better in terms of performance, as they are a mix of shares, bonds and cash. Some have also invested in property funds, although these have not fared brilliantly and many investors eager to leave these funds have been locked in for up to a year, so that the management have enough time to sell off properties in order to give investors their cash.

Pension providers were criticised for an over reliance on equities following the dotcom bust abd the Association of British Insurers recently said that UK insurers have changed their business models and now rely far less on investment in shares.

Performance vs stability

You may think performance is a secondary issue to stability, but the two are interlinked, as funds within pensions are the bedrock of many insurance companies. Ratings agency Fitch said last week that insurance companies are coming under more pressure as they suffer greater-than-expected losses to their portfolios. It expects these companies to report more losses in their results from July to September. As a result, it has downgraded the market in the UK to 'negative' from 'stable'.

It said: 'Of greatest concern to Fitch are declines in the market value of investment holdings that have led to significant declines in economic capitalisation and profitability for many insurers.'

Even though it cannot be forgotten that insurers do not have the same liquidity problems as banks, Goldman Sachs pointed out recently that the sector looks weak and added some unnamed companies may have to raise capital in the future.

How safe is your insurer?

Click on each of the links below to see how your insurer fares. But first some explanation…

Fitch ratings: These are used as a guide to a company's stability based on available funds and ability to repay debts. These ratings run from AAA (the best), down through AA+, AA, AA-, A+, A, A-, BBB+, BBB and BBB- for 'investment grade' institutions. 'Investment grade' generally means 'low to moderate risk'. There are 14 levels of ratings below this for 'sub-investment grade' companies. The share prices of publicly traded companies have also been included to give a reflection of market sentiment.

CDS rates: The CDS or credit default swap rate measures the cost of insuring a company's debt. So in theory the higher the figure, the riskier the institution - but CDS rates can be extremely volatile and depend on how many people are investing in the CDS market that day, what they think of the relevant industry and how they view that particular institution.

They are only of use if a rate is used in conjunction with other indicators and show a consistent trend over a reasonably long period of time. Daily peaks and troughs are not that significant.

Most major financial institutions have a rate between 100 and 300 in a normal environment. But even giant, stable banks such as HSBC have seen rates pushed higher than this during the credit crunch. Again, their use as an assessment tool in isolation is controversial. To see how they reflect a bank's safety, read Fears grow over Icelandic banks (again).

IMPORTANT: the following is advice offered to savers on the safest banks for their savings deposits. It is NOT investment advice and should not be regarded as such.

MAJOR UK INSURERS

• Aegon/ Scottish Equitable